The World Bank has cautioned that the diamond tracking and verification system introduced by the European Union (EU) and G7 nations in March could pose significant risks to Botswana’s economic growth.
The Bretton Wood Institute organisation issued the warning in a brief titled “Macro Poverty Outlook for Botswana: April 2024.”
The World Bank specifically highlighted concerns regarding the recent G7-EU diamond verification arrangement, noting that the potential risks to Botswana’s economic outlook include the impact of the G7’s decision on diamond traceability on the diamond trade and the local value chain.
The World Bank’s warning coincides with concerns raised by President Mokgweetsi Masisi and other diamond-producing countries in Africa regarding the lack of response from the EU and G7 countries to a letter expressing African producers’ reservations about the new tracking system.
Masisi recently told France’s minister of state for development and international partnerships, Chrysoula Zacharopoulou, to inform G7 countries that it would “be a regression in terms of our own development and an ominous threat to our own existence, and everything that we base our growth on,” Masisi said. He added that: “We just think that because they did not engage sufficiently, they haven’t come to appreciate what the threats are to industry and to livelihoods and the economies.”
The proposal by the Group of Seven (G7) to establish a central hub in Antwerp, Belgium, for all diamonds to undergo verification for G7 compliance has triggered significant opposition from diamond producers in Africa.
According to the World Bank, “Diamond value chain risks underscore the urgency of implementing structural reforms to boost growth and jobs, including through human capital development, enhancing market contestability, reducing regulatory and trade barriers, allowing for reductions in poverty and inequality.”
The World Bank notes that several factors may contribute to slow economic growth, including inward-looking trade policies, delays in implementing the Transitional National Development Plan, and the severity of the ongoing drought. These factors can negatively impact output and the current account through increased imports, as well as lead to renewed inflationary pressures and create fiscal pressures as the government provides support to affected households.
It says the economy is projected to expand by 3.5-4.0 percent annually over 2024-26 as the global economy strengthens and demand for copper and diamonds increases.
“Projected investments in power generation from coal bed methane, battery grade manganese, and solar photovoltaic projects will support GDP growth,” the World Bank says. It says an expansionary fiscal policy and accommodative monetary policy in 2024 are expected to support the economy but effects of the first are mitigated by leakages owing to a high import content.
“The fiscal deficit is projected to deteriorate to 3.4 percent of GDP in FY24, driven by large increases in capital and recurrent spending and to steadily improve over the medium term, reaching a surplus by 2026,” the World Bank says. It notes that projections hinge on SACU revenue trends and the government’s initiatives to boost domestic revenue mobilisation, which include the introduction of electronic invoicing for value-added tax.
It says reforms to promote competition, reduce the costs of doing business, remove policy barriers to trade and services, and promote trade facilitation would strengthen economic diversification, boost growth and exports, and encourage job creation.
“Improving the effectiveness and efficiency of public services, including public investment efficiency and strengthening education outcomes to meet the demand for skills in the private sector, could further enhance growth. Incentivising innovative new businesses to emerge and grow, attracting Foreign Direct Investment, creating linkages with local firms, encouraging market contestability would improve the business environment,” the World Bank says.
Noting that the financial sector remains profitable and stable, however, the World Bank notes that the ongoing repatriation of pension fund assets poses liquidity risks in local financial markets due to limited investment opportunities.
“After two years of a balanced budget, the fiscal balance deteriorated in 2023, despite higher Southern African Customs Union (SACU) revenues. Higher recurrent spending alongside capital investments underscore the need for improved expenditure efficiency,” says the World Bank. It says increased subsidies necessitate reevaluating their criteria, enhancing monitoring and evaluation, and exploring alternative policy instruments beyond price controls to improve spending quality. It says implementation deficiencies constrain the expansionary fiscal stance and require lower spending growth and a strong recovery in mineral revenues.
The World Bank says the current account turned into a surplus of 2.5 percent of GDP by 2023Q3 due to increased SACU receipts and mineral export proceeds. “Foreign exchange reserves increased, averaging US$4.7billion in October 2023, equivalent to nine months of imports, supported by increased SACU receipts and higher capital inflows,” says the Bank. It added that “Amid high domestic prices and weak job creation, poverty is estimated to have remained broadly unchanged.”
